- By the terms of thoughtfully developed Will or Trust documents;
- By automatic rights of survivorship covering certain types of jointly owned assets; and
- By beneficiary designation forms covering various accounts, policies, or contracts.
When we think of the estate planning arrangements we have made for the transfer of our wealth on death, most think immediately of the terms we have directed under our Wills or Trust documents. While, for some, these terms can be simple and straightforward, quite often they carefully address various contingencies, tax planning structures, different order of death scenarios, special trust arrangements for beneficiaries under certain ages, and so forth. It is important to remember, however, that stipulations in Wills and Trusts do not apply at all to assets passing by beneficiary designations (unless those designations actually direct the subject assets to pass into the decedent’s estate or into a trust established by the decedent). The types of assets typically governed by beneficiary designations include IRAs, pensions, other retirement accounts, life insurance policies, annuities, and pay-on-death (POD) or transfer-on-death (TOD) accounts. For many people, the portion of their total wealth harbored within these asset categories can be quite significant. Therefore, the impact of one’s beneficiary designations may warrant as much attention as the terms of the Will or Living Trust, or perhaps even more.
Still it’s hard to be too critical of folks giving minimal attention to their beneficiary designations. After all, the financial institution provides the form to be used; and it typically contains just a few lines of blank space for one to fill in names of intended heirs, relationship, dates of birth, etc. These forms almost never contemplate or suggest any special consideration being given to things like protective arrangements for certain heirs, tax planning structures, or an unexpected order of deaths. Often we get these forms to fill out on the spot or on a day when our heads are filled with anything other than a careful estate planning mindset. And the forms themselves do little to prompt us back to that reality. Even for those who do appreciate the planning significance, there is often a “let me just get something on file, and I’ll revisit it soon” mentality. However, those revisits often never occur.
A wake-up call is in order! Estate planning that does not consider the impact and appropriateness of our beneficiary designations is incomplete and often dangerous. In fact, many of the assets that typically pass by beneficiary designation are, by their nature, more planning intensive than assets that generally pass by Will. For example, IRAs and other qualified retirement accounts are subject to complicated IRS regulations and carry more significant tax burdens and planning opportunities than most other assets.
The following are just some of the types of questions so often overlooked or mishandled for beneficiary designated assets.
- Does your designation properly state what is to happen in the case of an unexpected order of deaths?
- Does your designation make appropriate arrangements or stipulations for a beneficiary who is under legal age, irresponsible, subject to creditor claims, disabled, in a tenuous marriage, etc.?
- Have you directed whether or not the assets passing by beneficiary designation are to bear any share of the estate tax burden they help create?
- Is the designation you have made causing forfeiture of some or all of the deferral or “stretch-out” opportunities for maximizing income tax benefits on qualified retirement accounts?
- Will the manner of distributions and percentages be different than the distributions occurring under your Will/Trust? If so, is that truly intended?
We must view our beneficiary designation “forms” as integral parts of our estate plans. This will often appropriately require customized beneficiary designation details to augment the boiler-plate forms that the financial institutions provide to us. Sometimes, getting those more elaborate designations filed and approved with the institution can be tedious. However, things do seem to be improving of late, as institutions are finally acknowledging and accepting the significance of these things; and those who are still being overly difficult are experiencing some loss of accounts to more enlightened and accommodating institutions.